• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In January 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Investing » Investing On Margin | How To Use Leverage And Not Get Burned

Investing On Margin | How To Use Leverage And Not Get Burned

Updated: June 5, 2021 By Robert Farrington

Tweet
Share
Share
Pin
Email
Print

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

Investing On Margin

Investing on margin can present an opportunity for you to grow your portfolio more quickly. But this path is fraught with risk for investors without a game plan.

Many investors have lost all that they invested (and then some) by using margin recklessly. And the strategy has has gained a deserved reputation for being dangerous.

However, it's possible to use leverage and not get burned financially. Let’s explore how to use leverage safely.

Table of Contents
Investing On Margin, Explained
How To Use Leverage Without Getting Burned
Understand Your Risk Tolerance
Learn The Ropes Of Investing First
Cap Your Leverage
Use Margin Sparingly
Set Stop-Loss Orders
Don’t Forget To Account For The Margin Rate
Final Thoughts

Investing On Margin, Explained

Before we can dive into the details of smart investment strategies that take advantage of leverage, let's break down how the strategy works. Essentially, investing on margin is using money that you've borrowed from your investment broker to buy investments.

Before can get started, you’ll have to apply and be approved for a margin account with your broker. Once the margin account is set up, you can use the cash and securities in your regular account as collateral to borrow more funds.

The point of investing on margin is to take advantage of potentially high returns. If you anticipate that a particular stock will rise, you may choose to use borrowed funds to buy more stock than you could otherwise. In order to make a profit, the investment must earn a higher rate of return than what is being paid in interest on the loan.

With the power to borrow more funds than you have on hand, investing on margin provides an opportunity to amplify your gains. However, this strategy can go south quickly as it will also amplify losses.

For example, let's say you invest $5,000 in ABC stock by using $2,500 in cash and $2,500 of margin. If the stock appreciates by 20% to $6,000, you'll actually make 40% on your $2,500 investment. But if the stocks falls by 20% to $4,000, you'll suffer a 40% loss.

How To Use Leverage Without Getting Burned

Now that you know a little bit more about investing on margin, it's clear that its riskier than investing with cash. However, that doesn’t mean it is always a bad idea. In fact, it can provide an opportunity for you to grow your portfolio more quickly. Let’s explore some of the strategies you can implement to avoid getting burned. 

Understand Your Risk Tolerance

Investing on margin is not a good choice for everyone. A successful investor that takes advantage of margins will likely have a high risk tolerance and willingness to track their investments closely.

If you don’t have a high risk tolerance, the potential downsides of investing on margin could be too great for you to stomach. And that’s okay! Don’t dive into investing on margin if you're uncomfortable with the idea of potentially magnifying your losses.

With a higher risk tolerance, you may be more comfortable taking on the risks that come with investing on margin. That comfort level can help you stick to your investment strategy through the inevitable ups and downs.

Not sure where your risk tolerance stands? Take a look at these assessments to find out.

Learn The Ropes Of Investing First

Building an investment portfolio is an exciting prospect. As you first dive into this new world of money, take things slow. I would not recommend investing on margins until you’ve gained a solid understanding of how the market works.

Without a clear understanding of the market, it's very easy to lose money with margin investing. Want some help learning how to invest in stocks? We've got you covered. Read our guide here >>>

Cap Your Leverage

If you're chasing higher returns, it can be tempting to go "all in." After all, you believe that a particular stock will rise and net you tremendous profits. However, you'll want to avoid overextending yourself. Rather than using as much leverage as possible, set a percentage of your portfolio that you are comfortable with and stick to that. 

You’ll have to decide for yourself where to cap your leverage usage. Many feel comfortable somewhere between 10% and 25%. With a cap on your leveraged opportunities, you limit the damage that can done to your portfolio when one trade goes against you.

Use Margin Sparingly

As I mentioned above, it's good to have a cap in mind whenever you use leverage. But you should probably take things a step further and avoid investing on margin too often.

When margin trading becomes a regular habit, it can be difficult to stay engaged and alert with monitoring your positions. Instead, only use margins when you find a worthwhile opportunity. With that, you'll be more likely to disciplined throughout the course of that investment cycle. This will allow you to keep everything on track to the best of your abilities.

If you aren’t able to commit the time and energy required to monitor your leveraged investments effectively, then you may want to hold off. 

Set Stop-Loss Orders

One way to limit your risk when investing on margin is to set a stop-loss order right after you enter a position. By doing so, you can automatically exit a position whenever the stock falls to a level that you decide -- even if you aren't monitoring your account at the time.

While stop-loss orders are incredibly useful tools, they can't mitigate all the risk of margin trading. Stop-loss orders only execute when the market is open. So they can't get you out of a position during after-market hours, even if your stock dives well below your desired exit point in between regular market sessions.

Don’t Forget To Account For The Margin Rate

Even with a lucrative stock opportunity, the interest rate attached to your margin could effectively eliminate any potential gains. Some brokers charge lower rates than others so it can pay to shop around.

But, as general rule, one of the best ways to minimize your margin interest costs is to keep a short-term investment mindset. Investments that you plan to keep for the long haul should be purchased with cash.

Final Thoughts

Investing on margin is a riskier strategy that won't be the right path for many investors. If you prefer a more hands-off approach to investing. setting up automatic cash investments with one of our favorite robo-advisors may be a better option.

However, a conservative use of margin could be worth considering for experienced and disciplined traders. By taking a cautious approach and using safeguards like stop-loss orders you may find that the risk is worth the rewards. 

Robert Farrington
Robert Farrington

Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.

He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.

He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.

Investing On Margin | How To Use Leverage And Not Get Burned
Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Investing Resources

Featured Broker Reviews

>  Vanguard (recommended)
>  Fidelity
>  Robinhood
>  TD Ameritrade
>  M1 Finance
>  Schwab

Featured Robo-Advisors

>  Wealthfront (recommended)
>  Betterment
>  WealthSimple
>  Vanguard Digital Advisor

Annual Contribution Limits

  • 401k Contribution And Income Limits
  • IRA Contribution and Income Limits
  • HSA Contribution and Income Limits
  • 529 Plan Contribution Limits

More On Investing

  • Best Online Stock Brokers In 2023
  • Best Brokerage and Investing Bonus Offers In January 2023
  • Best HSA (Health Savings Account) Providers Of 2023
  • 5 Best Investing Apps Of 2023
  • How To Buy Stocks Online For Free
  • The Best Robo-Advisors Of 2023
  • The Best Self-Directed IRA Providers Of 2023
  • The Best Traditional And Roth IRA Accounts Of 2023
  • Comparing The Most Popular Solo 401k Options
  • Top 3 Automatic Investment Apps Of 2023

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz